Great American appealed, arguing the
judgment was not binding because it was
not rendered in a fully adversarial trial.

Great American loses appeal

The court of appeals affirmed the trial
court’s judgment in most respects, holding that Great American had breached
its duty to defend the builder from the
Hamels’ suit, the damage judgment had
been the result of a fully adversarial
trial, and the builder’s assignment of its
claims against Great American to the
Hamels was valid. The court of appeals
reversed the portion of the judgment
awarding mental anguish damages,
holding they were not compensable as
a matter of law.

The dispute reached the Texas Supreme
Court, where Great American contended
the Hamels’ judgment had not been the
product of a fully adversarial trial and,
could not be enforced by the Hamels as
the builder’s assignees.

Great American argued the pretrial
agreement and stipulations entered into
by the Hamels and the builder ensured
that the builder had no real stake in the
trial’s outcome, resulting in a sham trial
shaped entirely by the Hamels and designed to aid in the prosecution of the
subsequent insurance litigation.

The Texas SupremeCourt’s decision

The Texas Supreme Court reversed the
court of appeals’ judgment and remanded
the case for a new trial.

The court noted that the enforceability
of the damage judgment against Great
American was valid, given that:

• The builder had assigned its claims
following, not preceding, a trial and
judgment;

• Great American had breached itsduty to defend; and• Great American had neither acceptedcoverage nor made a good faith ef-fort to adjudicate coverage before theHamels’ claims against the builderhad been resolved.

The court noted that one way to ensure
that a judgment accurately reflected the
plaintiff’s damages was to require that the
loss be determined through a proceeding
in which the parties “fully” — “or at least
actually and effectively” — opposed and
contested each other’s positions. The court
held that the “controlling factor” was:
whether, at the time of the underlying trial
or settlement, the insured bore an actual
risk of liability for the damages awarded or
agreed upon, or had some other meaningful incentive to ensure that the judgment or
settlement accurately reflect[ed] the plaintiff’s damages and thus the defendant-in-sured’s covered liability loss.

The court ruled that the pretrial agreement between the Hamels and the builder
had “eliminated any meaningful incentive”
the builder had to contest the judgment.
The court pointed out that the Hamels had
agreed not to enforce any resulting judgment against Mitchell’s personal assets or
his truck or “personal tools of the trade ...
even if in the name of [the company].” The
court added that although the agreement
technically had not foreclosed the Hamels
from pursuing other assets of the builder,
Mitchell himself had testified that the
company had no other assets except the
insurance policy.

Proceedings lost their adversarial na-ture when, “by agreement,” one party had“no stake in the outcome and thus nomeaningful incentive to defend itself,” thecourt explained. When a plaintiff agreed“to forgo execution of a judgment againsta defendant’s assets, whether in conjunc-tion with a settlement or before trial,” thedefendant no longer had “a financial stakein the outcome” and thus likely had “no in-terest in either avoiding liability altogetheror minimizing the amount of damages.”Applying that standard to this case, thecourt held that the pretrial agreement “ef-fectively removed any financial stake” thebuilder had in the outcome of the Hamels’suit, eliminating any incentive to opposethe Hamels’ claims. This turned their suit“into a mere formality — a pass-throughtrial aimed not at obtaining a judgmentreflective of the Hamels’ loss, but instead atobtaining a potentially inflated judgment toenforce against Great American.”

Accordingly, it ruled, the Hamels’ judgment was not binding against Great American in the lawsuit brought by the Hamels
as judgment creditors and assignees.

Formal agreement notalways required

Significantly, the court added that al-though a formal, written pretrial agree-ment that eliminated the insured’s fi-nancial risk was not always necessary todisprove adversity, the presence of suchan agreement created “a strong presump-tion that the judgment did not resultfrom an adversarial proceeding,” whilethe absence of such an agreement created“a strong presumption that it did.” An in-surer could overcome the presumptionby demonstrating that even though theplaintiff and insured defendant had notentered into any formal, written agree-ment, the evidence established that thedefendant had no meaningful stake in theoutcome of the underlying litigation.Finally, the court declared that a lackof adversity in a damages trial against aninsured could be cured in a subsequentcoverage lawsuit against the insurer — ifthe parties “properly” litigated the under-lying liability issues in the coverage suit.

That had not happened in this case, the
court concluded, because the parties had
not “thoroughly relitigate[d] all aspects of
the Hamels’ claimed damages.” The Texas
Supreme Court then remanded the case
for a new trial.

Steven A. Meyerowitz, Esq., (smeyerowitz
@ meyerowitzcommunications.com) is
the director of FC&S Legal, the editor-in-chief of the Insurance Coverage Law
Report, and the founder and president
of Meyerowitz Communications Inc.
This story is reprinted with permission
from FC&&S Legal (www.fcandslegal.
com), the industry’s only comprehensive
digital resource designed for insurance
coverage law professionals.